Business Finance Basics – A Guide to Understanding Business Finance


Business finance is a broad term that encompasses many things about the creation, management, and evaluation of monetary resources and investments in a company. It also includes business valuations, assumption of debts, funding for start-ups, buying of long term assets, expansion, merging, divestiture, financing for exit, and new business development. All of these require detailed analysis, in order to determine the risks involved, the costs involved, and whether or not the venture will produce a profit. This analysis requires not only experience, but also a formal written business plan. Unfortunately, not every business plan provides the level of detail that is required to facilitate proper funding, lending, and business valuation.

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The first part of business finance is the assessment of debt relationships. Debt is any indebtedness that is incurred by a company to fund its operations and its purchases. Examples include long term loans such as credit card debt, bank loans, and personal loans. Other types of debt are capital debt, which is usually secured by property (like real estate or equipment), and operational debt, which is usually derived from the revenue stream and is debt that does not necessarily have to be repaid. A typical component of capital finance is the raising of additional funds from the owners of the business to fund day-to-day operating expenses and growth opportunities.

The second part of business finance is the use of capital to make money. Capital can be raised in a number of ways, the most common of which is to issue stock options. Stock options are purchases at a pre-determined price, held until the exercise date, and then exercised to buy back the option at the strike price. Although stock options give you the chance to buy a large amount of stock at a low price, they carry the risk of the market falling and you losing most of the money invested; therefore, they should be used with caution.